NFLX Analysis

Update 11/18/2015: I completed my exit of NFLX with just a few days to go before expiration.

During the lifetime of the position, shares rose by 1.5% over 20 days, or a +27% annual rate. The options position produced a +122.2% yield on debit for a +2,231% annual rate.

---

Update 10/19/2015: Profit on my NFLX position exceeded 50% of its maximum potential. I exited the puts, transforming the iron condor into a bear call spread. This eliminates time risk to the downside (there is very little risk to the upside).

I held on to the calls because they are too far out of the money to attract a buyer and I expect them to expire worthless for maximum profit.

I'll calculate the results after the calls are sold, winding up the entire position.

---

The video entertainment company Netflix Inc. (NFLX), headquartered in Los Gatos, California, publishes earnings Wednesday after the closing bell.

[NFLX, in Wikipedia]

NFLX

I shall use the NOV series of options, which trades for the last time 37 days hence, on Nov. 20.

Ranges

Implied volatility stands at 85%, which is 4.8 times the VIX, a measure of volatility of the S&P 500 index. NFLX’s volatility stands in the 83rd percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	137.94	167.32	126.24
Lower	79.18	49.80	90.88
Gain/loss	27.1%	54.1%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I shall use a neutral strategy in building a position for NFLX, based on no expecting an earnings surprise. However, history suggests a bullish bias, so I shall attempt to skew the position to the upside.

Iron condor, short the $140 calls and long the $150 calls,
short the $90 puts and long the $70 puts,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
Upper	140	89.3%
Lower	90	71.7%

The premium is $2.80, which is 28% of the width of the position’s wings. The stock at the time of entry was priced at $109.13.

The risk/reward ratio is 2.6:1.

The zone of profit in the proposed trade covers a $25 move either way. The biggest immediate move after each of the past four earnings announcements was $17.68, and the average was $12.78.

Decision for My Account

I've opened a position in NFLX as described above.

-- Tim Bovee, Portland, Oregon, Oct. 14, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.